October 25, 2002 | Commentary on
ED102502: Two Cheers for Bankruptcy
Many normal people -- not to mention politicians looking to exploit
the latest headline -- talk about corporate bankruptcy as if it's
some sort of financial scam, a gimmick perpetrated by malevolent
corporations to avoid paying their bills. So it's not surprising to
see some politicians on the campaign trail using high-profile
bankruptcies as an excuse to play politics, blaming the Bush
administration for mismanaging the economy.
This may make good political theater, but it's economic nonsense.
Bankruptcy certainly isn't good news, but it's absurd to think that
corporations deliberately choose it. It's equally silly to blame
President Bush. The events cited most often in recent bankruptcy
filings -- bad corporate decisions and the stock-market bubble --
occurred mostly in the late 1990s.
It's important to understand that bankruptcy isn't a cataclysmic,
end-of-the-world event. In most cases, a company continues to
operate. Most jobs are preserved, and consumers still have access
to the firm's products. This is because bankruptcy laws are
designed to minimize the economic fallout when a company falls into
In effect, bankruptcy laws give a troubled firm a chance to
reorganize. Debts are rescheduled, contracts renegotiated, and
unprofitable divisions sold or terminated. These are usually
difficult and unpopular steps, but they sure beat the alternative.
Without bankruptcy laws, a company with cash-flow problems might
have to shut its doors immediately and keep them shut forever. All
of its jobs vanish, and the market loses a provider of goods and
The WorldCom bankruptcy is a good example. Despite its troubles,
the telecommunications giant still employs 60,000 workers and
serves millions of consumers. It's impossible to know whether the
company will become profitable again, but even in a worst-case
scenario, Chapter 11 bankruptcy creates an opportunity for orderly
liquidation. This minimizes the damage to the overall economy while
also serving the interests of workers and consumers.
Workers and consumers are just two of many parties that benefit
from properly designed bankruptcy laws. Shareholders and creditors
also would experience huge losses if companies couldn't reorganize.
When firms permanently shut down, their only remaining "asset" is
the money that can be raised by disposing of property and equipment
at fire-sale prices. Shareholders almost certainly wind up losing
their entire investment, and creditors -- such as banks and vendors
-- are lucky to recover a small fraction of what they're
Some critics argue that bankruptcy laws are too easy. This claim
isn't without merit, and policymakers should ensure the system
isn't exploited. But it's important not to throw out the good with
the bad. Many major companies, including Continental Airlines,
Texaco and Southland Corporation (7-Eleven stores), are operating
today because bankruptcy laws allowed them to reorganize.
Bankruptcy laws also may help America compete in the global
economy. Some of our European trading partners think the ability to
reorganize gives American companies an "unfair trading advantage."
But there's nothing "unfair" about sensible economic policy. If
Europeans worry that their companies are uncompetitive, they should
fix their own laws and stop criticizing America's more successful
Risk-taking and entrepreneurship fuel economic growth -- and this
explains why the dark cloud of bankruptcy has a silver lining. Most
small businesses fail, but the ones that succeed are America's
chief innovators and job creators. America's entrepreneurial
culture promotes this economic dynamism, partly because it's
understood that the ability to succeed goes hand-in-hand with the
ability to fail.
Corporations employ tens of millions of workers, pay tens of
billions in taxes, and help keep America competitive in the global
economy. Yet many politicians make "big business" a political
whipping boy. This is shortsighted. Instead of bashing
corporations, lawmakers should improve economic policy.
Tax reform would be a good place to start. The United States has
the fourth-highest corporate tax rate in the developed world. And
with Belgium and Italy planning to lower their business tax rates,
America soon may have the unwanted distinction of imposing the
industrial world's second-highest tax burden.
But lower tax rates are just a start. Policy-makers also should
eliminate the "double taxation" of corporate income; taxing
dividends at both the corporate level and the individual level
discourages investment. It also encourages companies to assume too
much debt, which is part of the reason some firms wind up declaring
President Reagan once summed up the big-government view of the
economy like this: "If it moves, tax it. If it keeps moving,
regulate it. And if it stops moving, subsidize it." He was right.
Let companies compete to win, and avoid the temptation to interfere
when they fail.
Distributed nationally on the Knight-Ridder Tribune wire.